The Future of Rail Franchising

Ben Blackburn, of Freshwater’s public affairs team, makes the case that while the message may be blunt, the Transport Select Committee’s recommendations on franchising should be taken seriously.

At a time when the rail industry is seeking to drive innovation, skills and improvements for its users, it is ironic that the most well received rail story in recent weeks was about the reintroduction of a steam locomotive onto the regular timetable.

Seeing a steam locomotive in full flight should give any right-minded person a warm thrill of delight. Well over 5,000 enthusiasts and regular Northern passengers will have been delighted to travel behind a ‘Tornado’ between Appleby and Skipton, billed as the first scheduled main line steam service since 1968.

While some will have grimly remarked that, as it was built in 2008, the ‘Tornado’ is significantly newer than much of the Northern fleet, many will have noticed how the widespread, positive, reporting of this Plandampf service provoked a striking contrast with the type of coverage we are used to seeing about the regular franchised railway.

And, as the Transport Select Committee told the industry in February, the negativity may not be without foundation.

Despite the best efforts of the shadow transport team, in the absence of a well-coordinated official opposition with the appropriate resources to properly scrutinise government policy and make substantial and sophisticated new proposals beyond the safe zone of nationalisation and industrial relations, the value – both democratic and political – of the transport committee, is arguably at an all-time high. Its Labour chair, Louise Ellman, is long-established in the role (having served on the transport committee or variations of it for 16 of her nearly-20 years in parliament) and as a result gives the committee authority and influence.

While the committee has a broad remit across all modes, it is clear that rail is a priority.

According to the outcome of the committee’s inquiry into franchising, the model is simply not delivering. It is not maximising passenger benefits, is driving inefficiencies and is marked by governance failings.

On performance, the committee states that, while much improved from the turn of the millennium, PPM improvement has been stagnant since a high in 2011-12. In any case, PPM is – so says the committee - not a fair reflection of the “real” passenger experience. Indeed, customer satisfaction has been declining since 2011, when the National Rail Passenger Satisfaction Survey first started.

On cost, the report is slightly more positive, but raises concerns about the government’s strategy of shifting more of the burden of paying for the railways to passengers. It states that ‘peak’ and ‘any time’ rail tickets - while among the most expensive in Europe - have been increasing in cost at a slower rate than other high-income EU countries. ‘Advance purchase’ and ‘off-peak’ tickets for long-distance journeys are often equivalent or cheaper than elsewhere. The report also draws attention to the “staggering” 23.5% real terms increase in fares since 1995 (40.9% on long-distance routes) and suggests that a better balance could be struck between passengers (through the fare box) and the public purse, when it comes to paying for the railway - passenger share of total industry income has risen by nearly 15% between 2010-11 and 2014-15.

On competition, the committee states that the system is failing to deliver adequate levels of market interest and - relatedly - sufficient volume of opportunity. In the six years to 2012, only two contracts were let, and in the three years from the re-setting of the market in 2012, 10 out of 16 decisions were made through direct awards, without any competition.

Declining profit margins and higher financial risks in running a franchise are undoubtedly factors in owning groups’ decision making, as are the upfront costs of entering a competition (between £5m and £10m) and the requirement to raise hundreds of millions in bonds, the ‘Parent Company Guarantee’, to protect the Treasury’s coffers from the risk of failure.

For the committee, the current model of franchising is unsustainable. It recommends that the DfT streamlines bidding costs and enables more competition, through appropriate encouragement of open access. It is, however, adamant that the Parent Company Guarantee should be retained.

The committee cites the size and complexity of today’s franchises as keeping operating costs high and inhibiting efficiency. Geographically larger than elsewhere in Europe and fewer in number now than at privatisation, franchises – as exemplified by the TSGN super-franchise – are often highly complex. One can include several different types of operation and commercial market, reducing the potential for economies of scale to be realised. The committee calls upon the department to review the structure of each franchise and their alignment with the markets they serve, as they come up for renewal.

Another recommended intervention is to dispense with a one-size-fits-all approach to franchise length, and instead – upon expiry – seek to procure longer franchises where operational risks are low and performance has been good. But, while this may enliven competition at the procurement phases (who wouldn’t want to operate a lower risk franchise for longer?!) it would be essential to accompany such an approach with more requirements for in-franchise innovation and plenty of rigorous checks and balances.

Finally, the committee identified the misalignment between franchise periods and Network Rail’s control periods as a key failing which results in a sub-optimal service for passengers, who suffer the delays and inconvenience of network and infrastructural underperformance. The lack of visibility on Network Rail funding also constrains prospective franchisees when they are developing their bids.

For the Department of Transport (DfT), the committee’s findings and recommendation are particularly significant. Questioning the sufficiency of its structures and personnel, the committee is calling for an independent and public review of the DfT’s franchising functions, which may also include a consultation on whether enforcement powers should be transferred from the department to the Office for Rail and Road (ORR).

While the government has not yet responded to the committee’s report, there is little doubt it will be taking its findings very seriously. The performance of the system is a matter of concern for operators, investors and the whole supply chain – as well as for Network Rail, the regulator and the department. While transport ministers have found it relatively easy to bat off criticism coming from Her Majesty’s Official Opposition, the committee’s findings should give Labour more ammunition to make the case for nationalisation as and when franchises come up for renewal.

It has recently been observed that the government has bandwidth for only one issue – Brexit. And this may well be true. But Brexit also presents departments with a good reason to undertake wholescale reviews of their work. If transport ministers wanted to tackle franchising without seeming to be undergoing a complete volte face, they may consider the upheaval and bottom-up rethinking that Brexit will force across government an opportune time to do so.

This article first appeared in Rail Professional magazine, April 2017.